Smart Benefits: Reverse Auctions Bring Down Health Benefit Costs
Monday, February 11, 2013
What is a reverse auction?
Unlike traditional auctions, which are used to drive prices up for in-demand items, reverse auctions create demand for a service, and push prices down.
Reverse auctions hold appeal for goods or services that are often considered “commodities” and purchased in a highly competitive arena with lots of sellers.
Increasingly, larger employers - those with 500 or more employees - interested in saving money on less complicated benefits like life and disability insurance, prepaid dental insurance and even vision plans are taking part.
That's because participating employers report savings of anywhere between 10-25%, depending on the benefit.
How do reverse auctions work?
Unlike a traditional auction, the buyer initiates a reverse auction by setting the specifications and describing the need (e.g. life insurance). Prequalified sellers (i.e. insurers) are invited to place electronic bids for the employers' business.
All the action takes place during a specific timeframe established by the buyer. Sellers compete live so there is complete transparency, helping to drive prices down for the employer. The selected finalists are then given an opportunity to revise their pricing.
The key is to set up the auction so the buyer can make easy comparisons between the sellers, both on price and ability to meet the buyer’s specifications.
For the employer crunched for time, reverse auctions consolidate benefits purchasing from months to days. Employers who want to streamline the process even more can ask their benefit advisor/broker to act as a third party on their behalf, and do most of the work for them. These professionals who are familiar with and have access to reputable reverse auction systems can run the entire auction, further limiting the employer’s involvement and time.
Employers should take some precautions in this new purchasing arena:
- Consider the sellers and pre-qualify them to understand who is bidding.
- The sellers want business so some may “lowball" their bids. For this reason, it’s critical to compare beyond just price.
- Outline expectations to sellers in advance and be clear about objectives when writing the specifications.
- Consider “value-adds” that sellers are willing to provide or support their services with.
- Make sure that all sellers are evaluated on a level playing field, which helps build trust with the sellers
- Make sure the seller is able to implement the benefits program in accordance with your schedule.
- Request and review service agreements before making your final decision.
With reverse auctions calling, there are sure to be a lot of winners.
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